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Remarks of Deputy Secretary Raskin at the University of Maryland- Baltimore County

4/29/2014

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Good afternoon. Thank you,
President Hrabowski and UMBC, for inviting me here today. And thank you
to the students for joining us. I just had the privilege of being part of
a roundtable discussion with different students, and I am blown away by the
thoughtfulness and astute insight that the students here are bringing to their
educational experience. Today, I want to focus on a complicated, but
crucial component of the academic experience: student loans. This is a
multi-faceted topic and while I cannot address all of its different dimensions,
I would like to specifically highlight the growth of student loan debt, its
impacts, and policies and programs to reduce burdens, increase accessibility,
and drive economic growth.

But before I start, I want to
tell you that I’m particularly excited to be at your wonderful school.
UMBC, under the leadership of President Hrabowski, is doing terrific,
innovative work. The Meyerhoff Scholars Program is just one
example. Because of this program, participation of underrepresented
minorities in biomedical PhD programs here has increased dramatically.
And it is just one example of President Hrabowski and UMBC’s stellar
achievements. Among others are President Hrabowski’s work as chair of the
National Academies committee, his work on President Obama’s Advisory Commission
on Education Excellence for African Americans, his insightful writings, and his
numerous honorary degrees. Of course, as a fellow Marylander, I would be
remiss if I didn’t mention his Marylander of the Year honor. Not to
mention UMBC’s standing as the nation’s number one “Up and Coming” university
for the past five years and its ranking among the nation’s leading institutions
for “Best Undergraduate Teaching.” This is truly impressive. U.S.
News and World Report may say you’re up and coming, but given what I know about
this place, it is clear that you have already arrived.

Your chess team is world famous,
and my husband, who is a Maryland State Senator and captain of the Senate’s
chess team, told me that he lasted about six minutes playing the 21-year-old
captain of your team, who beat him while playing two other senators at the same
time!

President Hrabowski, you and your
students are an inspiration to us all. I am very excited at the chance to
be with you here today.

With that, I’ll turn to the
primary focus of my remarks: First, I’m going to describe why completing
higher education matters to the economy. Second, I’m going to describe
the growth of student loan debt and ask some questions about how to evaluate
the extent to which the levels of student loan debt are problematic.

There are many
benefits to higher education that we could discuss in detail; better health,
higher civic engagement, and intellectual growth.[1] But, the benefit that I
want to emphasize today is the benefit to our country’s economic growth and
prosperity. The strength of our economy depends on its ability to harness
the creative and productive potential of graduating students. People with
skills, judgment, fortitude, and insight enhance our economy’s ability to
achieve momentum and vitality.

Our economy cannot and will not
grow to its full potential without you and your contributions. The United
States enjoys one of the highest GDPs per capita in the world, and this is due
in large part to the high productivity of American workers. Workers who
are more educated are not only more efficient, but also develop innovations
that make all workers more productive.[2] We should therefore aim to
create policies that make education accessible for all because expanded
education is key to enhancing the vitality of our economy and our global
competitiveness.

The evidence speaks clearly to
the high pay-off individuals receive from a college education: Graduation
from a four-year higher education institution increases lifetime earnings by
hundreds of thousands of dollars,[3] and college grads are the only
educational group that has enjoyed real wage gains over the last several
decades. In 2013, those with at least a college degree were approximately
half as likely to be unemployed as those with only a high school diploma.
Recent work from the Pew Foundation underscores the key role that education
plays in promoting mobility.[4] Pew found that without a
four-year college degree, children born in the bottom income quintile have a 45
percent chance of remaining there as adults. With a degree, they have an
80 percent chance of being in a higher income quintile than their
parents. Education is a major path to upward mobility.[5]

At the same time that the data
points to enhanced economic outcomes for students with four-year degrees, we
are confronted with the stark reality that middle and lower-income families are
less able to afford the cost of a degree. College affordability is a
pressing concern because tuition increases at colleges and universities across
the nation have been quite dramatic. Though increased grants and
scholarships mean that net tuition might rise less than the full tuition price,
at a public four-year school, net tuition is still, on average, 50 percent
higher today in real terms than it was in 1994.[6] At for profit schools,
tuition is often higher than at public universities and completion rates are
lower[7]. Furthermore, the challenges associated with paying
for higher education have been exacerbated in recent years by our slow recovery
from the worst recession since the Great Depression. Home prices have
made only a partial recovery from their lows; long-term unemployment is still
more than twice as high as its historical norm; and tightened credit markets
make it more difficult to access some types of credit financing. Many
middle-class families simply do not have the financial resources that they did
prior to the financial crisis.

These considerations have driven
the Administration’s efforts both to help students and families pay for college
and to rein in the cost increases we have seen in recent decades. The
maximum Pell Grant award has been increased by more than $900, and the number
of Pell Grant recipients has expanded by more than 3 million since 2008.
The American Opportunity Tax Credit was also created to provide up to $2,500 of
tax credits per year for four years of college tuition. To further curb
cost increases, the Administration’s Race to the Top for College Affordability
and Completion seeks to create incentives for states to maintain funding for
higher education and pursue reforms that will lower prices.

Even so, at the same time that
our economy needs to be nourished and rejuvenated by people who have had a
higher education, students are finding it increasingly difficult to finance
their studies. Students often foot tuition bills themselves by working
through school, drawing down savings, or taking on student debt.

An estimated 60 percent of
undergraduates who received four-year degrees in 2012 finished with some
student debt,[8] as compared with 30 percent of
graduates in 1993.[9] These numbers also are
affected by the type of school a student attends, whether it’s a public
community college, a private four-year school, or a for-profit school.
The vast majority of student loans today are financed by the federal
government.[10] At private and for-profit schools, greater
percentages of students rely on federal student loans to finance their
education than at public colleges.[11] For example, during the
2011-2012 school year, 17 percent of students attending public two-year schools
took out federal loans, compared with 61 percent of those attending two-year,
for-profit schools.[12] In all, at the end of
2013, there were more than 40 million student loan recipients and approximately
$1.1 trillion in debt outstanding associated with federal student loan
programs.[13]

These numbers are daunting; to
what extent should we be concerned? Or more precisely, is there data and
evidence suggesting that these numbers could create potential headwinds to our
country’s economic growth? What markers should we be paying attention to?
As a steward of the federal government’s finances and of the American economy,
the Treasury Department has a strong interest in making sure we are asking the
right questions when we consider the number of student loan borrowers, the
amount of student loan debt outstanding, and how borrowers are faring with
student loan debt over time.

We must also bear in mind that
many students borrow amounts that are reasonable given the enormous potential
individual returns to higher education. As I noted earlier, student loans
serve an important economic purpose, helping students invest in their potential
through higher education and generating positive spillovers from each
individual’s education. As a society, we recognize that federal student
loan programs provide millions of deserving, talented, ambitious students like
you with the ability to contribute to our economy.

But we want to be clear-headed
when we evaluate the sustainability of these debt levels and the challenges
associated with repayment. To do this, we need to look carefully at the
performance of these loans. For example, what portion of outstanding
student borrowers are delinquent, meaning they have missed one or more
payments? What portion of outstanding student loans are in default, which
usually means an individual is 270 or more days late in making a payment and
has not made any arrangements – like deferment or forbearance – to temporarily
postpone payments? How are delinquencies and defaults changing over
time? In other words, what portion will not get repaid and what
consequences will a borrower face when the loan is not repaid? Given that
people generally don’t know, at the time the loan is originated, how much money
they will make at the time they graduate and beyond, we have to make sure there
are appropriate options in place to help them manage their debt loads.

Let’s drill down a bit on these
questions: Among those who borrowed, undergraduates who recently finished
school have an average of approximately $30,000 in student loan debt,[14]
and the large majority of graduates who are able to make payments on this debt
will spend 10 years or more paying it down, juggling high monthly payments with
working, paying rent or a mortgage, raising children, and building a
future. For other graduates, this burden will be too much to bear.
Of borrowers who entered repayment in FY 2010, nearly 15 percent had defaulted
by the end of FY 2012, and for those at for-profit schools, the number was even
higher at nearly 22 percent.[15] While delinquency rates on
many other types of debt have fallen in recent years, delinquencies on student
loan debt are rising. Evaluating these levels depends, in turn, on
understanding fully the consequences of delinquencies and defaults.

What are the costs associated
with delinquent loans? For one, delinquent borrowers could have future
problems accessing credit, affecting the person’s ability to buy a car or a
first home. In some cases, delinquency can even affect a person’s ability
to participate fully in the economy because many employers run credit checks as
part of their standard employment verification processes, and a poor credit
history may send a negative signal, causing an employer to think twice about
hiring a delinquent borrower. Default carries even more serious costs and
consequences. A report from the National Consumer Law Center noted that,
“Vulnerable students attempting to better their lives face severe consequences
if they default on federal student loans.”[16]
They can have their wages garnished and their credit marred for many
years. Even borrowers who ultimately avoid default and repay their debt
can face additional charges if they fall behind on their payments at any point.
This can require further sacrifices to pay the monthly bills, dampening
consumption and hindering the economy’s recovery.

The sustainability of high levels
of student loan debt needs to be analyzed against the backdrop of the more
granular data. And, to the extent that adverse costs and consequences
associated with student loan indebtedness can be mitigated or eliminated, we
should think carefully about how we do that. For example, we should put
in place policies to help people make informed decisions about where to go and
how to pay for school, and strengthen our efforts to inform and protect
borrowers at every stage of the process.

When it comes to helping students
choose the right educational path, the Administration has continuously pushed
to centralize, standardize, and make accessible information that can help
students make an effective comparison between schools. Through the
Department of Education’s College Scorecard, this information is now available
in an interactive format that helps families weigh their options and make
informed decisions about higher education and their financial
responsibilities. Additionally, the Consumer Financial Protection Bureau,
in partnership with the Department of Education, launched a “Know Before You
Owe” campaign to make sure students have information on the true costs of
financing a degree. With input from students, parents, guidance
counselors, and college officials, the Department of Education and the Consumer
Financial Protection Bureau have created a standardized financial aid shopping
sheet that is now used by more than 2000 colleges and universities.

The affordability of student
loans, as compared to returns from the investment in higher education, is also
relevant to understanding the sustainability of these high debt levels.[17]

The effectiveness of servicing
and collection efforts is also relevant in determining whether student loans
are resulting in dangerously high levels of delinquencies or defaults. As
a lender, that evaluation includes making sure the government’s student loan
servicers – the name we give to banks or similar institutions who receive and
process the borrower’s monthly payments on the government’s behalf – know
immediately when a borrower is in trouble and can be ready to offer that
borrower a repayment program that gives him or her the best chance of
successfully repaying their loans. However, nearly 7 million Americans are now
in default on a federal student loan.[18] Under current law, these
borrowers can be subject to wage garnishment and tax refund offset, making it
more difficult to get back on their feet. But we must ask the hard questions
about why these borrowers were unable to enroll in loan modification programs,
such as the Pay As You Earn plan, with their federal student loan servicer to
avoid default.

We have a world-class higher
education system that is the envy of people living on every continent; our
system of financial aid and federal student lending should be world-class and
world-famous as well. From the time students sign the promissory note to
the moment they make their final student loan payment, we must have the
necessary programs in place to ensure they are able to successfully manage
their loans. The federal student loan servicers are often the main touch
point for borrowers once they leave school and are therefore vital to improving
the higher education financing system. All borrowers should be able to
rely on a system in which the servicer, the university, and the government provide
information and resources to help borrowers manage their loans
successfully. This is critical to ensuring that taxpayers recoup their
investment and that borrowers can make the most of their education without
being sidetracked by the consequences of delinquency or default. With
nearly $1.1 trillion of outstanding federal student loans, we have an
obligation to work across agencies, with servicers, and with schools to inform
and protect borrowers’ best interests.

These tasks require that we have
sufficient data and information to assist troubled borrowers. If we can
understand the patterns that lead to delinquency and default, we may be able to
predict and even preempt such outcomes to the benefit of borrowers, taxpayers,
and economic growth. By working with servicers and across government, we
can measure and improve borrower outcomes in ways that assure our higher
education system is an engine for continued income mobility and economic
growth.

Thank you for inviting me to be here
with you today. I wish you all success in your future endeavors, and I am
confident that you, under the strong leadership of President Hrabowski, will
achieve great things and make an indelible mark on the world around you.

[1] In
addition to the benefits in terms of income, mobility, and economic growth
discussed here, people with a college degree have better health, higher civic
engagement, and are less likely to draw on the social safety net (Baum, Ma,
& Payea 2010).

[5] In
addition to these benefits to the individual, people with a college degree have
better health, higher civic engagement, and are less likely to draw on the social
safety net (Baum, Ma, & Payea 2010).

[10] While
estimates of the size of the private student loan market vary, federal student
loans are believed to account for over 90 percent of new student loan
originations in recent years. See Consumer Financial Protection
Bureau, Private Student Loan Report.

[15] The
Department of Education defines a 3-year cohort default rate as the percentage
of a school's borrowers who enter repayment on certain Federal Family Education
Loan (FFEL) Program or William D. Ford Federal Direct Loan (Direct Loan)
Program loans during a particular federal fiscal year (FY), October 1 to
September 30, and default or meet other specified conditions prior to the end
of the second following fiscal year. Available at
http://www2.ed.gov/offices/OSFAP/defaultmanagement/cdr.html.

[16] NCLC,
The Student Loan Default Trap. Available at
http://www.studentloanborrowerassistance.org/wp-content/uploads/2013/05/student-loan-default-trap-report.pdf.

[17]Accordingly,
policies to make student loans more affordable are worth noting. One such
policy has resulted in interest rate reductions for new federal student
loans. Instead of charging students a fixed 6.8 percent on undergraduate
loans, the Bipartisan Student Loan Certainty Act of 2013 set the rate on new
undergraduate loans this past year at 3.86 percent. In addition, the
Administration’s Pay As You Earn plan uses borrower income, rather than student
loan amount, to calculate monthly loan payments. And we have been working
to help make sure eligible borrowers are aware of repayment plans such as Pay
As You Earn through efforts like our recent partnership with Intuit’s TurboTax
team that communicates student loan repayment options to millions of borrowers
at tax time.

Normally,
borrowers make fixed monthly payments on their federal student loans over a
period of time, but this payment structure does not take into account the fact
that much of the payoff from a college education comes only after a graduate
has gained some experience. New college graduates can still struggle with
loan repayments, especially in the current economic environment. The PAYE
repayment program caps the monthly loan payment at 10 percent of a borrower’s
discretionary income and forgives any remaining balance after 20 years.

[18] See
Direct Loan and Federal Family Education Loan Portfolio by Loan Status,
available at http://studentaid.ed.gov/about/data-center/student/portfolio.​

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